A tax-free savings account (TFSA) lets you save extra cash for just about anything. TFSAs are highly flexible and can be used for rainy-day savings, a new home or retirement.
TFSAs let you save up money without paying taxes on growth within the account or withdrawals.
Despite these obvious savings and tax benefits, since the Government introduced the TFSA in 2009, only about 50% of Canadians have opened one. This is unfortunate because TFSAs really are a great savings option.
To help better understand what a TFSA is and how it works, we’ll answer six questions about TFSAs.
1. What kind of investments can I hold in a TFSA?
Traditionally your savings account was probably what you had in your piggy bank, and would suggest deposits, low risk and of course low rates. TFSAs offer far more options; just about any investment you can hold in an RRSP can form part of a TFSA. Bonds, mutual funds, stocks and so much more are available to you.
Often it is the name that causes confusion. Several banks and financial institutions advertise a percentage for their cash TFSAs which tends to be quite low. The TFSA is a savings shelter similar to an RRSP, so you need to choose the investment that goes within it.
2. Can I have more than one TFSA?
There is no limit to the amount of TFSAs that you can have, but there is a limit to the total amount you can contribute to your TFSAs. Regardless if you have one or many accounts, the annual TFSA limit (or your total contribution room) is a per person limit.
While there isn’t any real risk to having multiple TFSAs, you should consider the following:
1. Don’t overcontribute. Keeping track of contributions is key. Over-contributions to TFSAs are subject to a 1% penalty tax per month (this applies only to the over-contribution amount). If you have more than one TFSA, make sure you track your contributions.
Did you overcontribute? Reach out to one of our advisors to help you fix it.
2. Fees add up. If you have multiple managed accounts that charge fees, then you may need to look at consolidating your accounts. This means less management fees and less contributions to track.
3. Can I deduct TFSA contributions on my tax return?
TFSA contributions are different than RRSPs in that they are not deductible for income tax purposes. The reason why? The money you contribute to a TFSA is after-tax money, so there is no tax on the amount invested or any growth when you withdraw it.
4. Can I use a TFSA as an emergency fund?
You can use a TFSA for your existing savings, even if they’re modest. Money in a TFSA can be accessed at any time, as long as you don’t lock the funds into a non-redeemable investment. This can make TFSAs into the perfect emergency fund. TFSAs can help you get through unexpected events, like job loss – or even a global pandemic. You’ll have the security of knowing the money will be available if you need it.
5. Can I use my TFSA for income splitting?
Yes! Your TFSA can be used as an income-splitting tool to lower your family’s overall tax bill. The higher-income spouse gives money to a lower-income spouse to contribute to their TFSA. The higher-income spouse doesn’t get a tax deduction like they would with a spousal RRSP. However, the interest earned on the money invested in a TFSA isn’t taxed, leading to a net reduction in tax. There are potential negative tax implications when attempting such a maneuver using non-registered investments, so be sure to talk to an advisor before going down this road.
6. Can I name my spouse as a successor or beneficiary?
For the purposes of estate planning, there are two options to leaving your TFSA to a spouse:
Investments can continue to grow and can be withdrawn tax-free. (Note: You can only name spouses, including common-law partners, as successor of a TFSA).
The surviving spouse could pay taxes on any interest or growth earned in the TFSA after their spouse’s death.
The rules can be complicated (and different in Quebec). So, it’s a good idea to talk with an advisor about your options.
Need help saving?
Our advisors can help you make decisions and maximize your savings. We can meet in person or virtually – simply contact us to book an appointment.